How To Invest In A Startup
Dr Mukesh Jindal
Dr Mukesh Jindal CFA, CFP, CAIA, Ph.D, Co-Founder, Alpha Capital.
If we look back at the last 10 years or so, one thing in the business segment that has attracted the maximum glare is the startups. The attention that the startups have attracted is not restricted to any particular section of the society. Be it college students, established corporate or retired professionals, everyone wanted to bite a piece out of the startup pie.
Even the current government introduced facilities and guidelines to assist the startups, financially and otherwise. Talking about financial assistance, and investments into the startups, many people have developed an unavoidable interest to park their funds into some of the startups in return for equity or simply by extending debt.
Startup investment has come up as a viable source of secondary income for some, while many others have become full-time angel investors, owning equity of multiple startups and enjoying handsome returns.
Despite how lucrative the idea might seem, there are obviously certain things to be kept in mind while investing in a startup.
Understand the business
Get familiar with the people involved
Debt or equity
Look for hidden details
Learn to say NO
If you are a true entrepreneur, you probably already know how! Learn to deny if you are not 100% comfortable or familiar with the idea.
Research
Scalability
Startup funds
Government Grants & Funds
Funding for Indian startups went beyond angel investors and VCs in 2016 when the government of India launched the Startup India program. The program offers grants, like an 80% rebate on patent costs and income tax exemption for the first three years, to startups registered under the scheme.
The government disburses the funds as loans through the Small Industries Development Bank of India Fund of Funds Scheme. The scheme invests in venture capital and alternative investment funds that invest in startups. Last year, the government also launched the Startup India Seed Fund scheme which provides funding support to early stage startups.
For the current year, the government has allocated INR 1,000 Cr for the Fund of Funds for Startups and INR 283.5 Cr for the Startup India Seed Fund Scheme .
How To Raise Startup Capital For Your Business
The startup funding ecosystem in India has been growing exponentially since the last decade. Despite the COVID pandemic, India saw a massive boom in its startup ecosystem in 2021. India also emerged as the third-largest startup ecosystem in the world in 2021. This growth is only expected to rise.
Investopedia defines a startup as a company founded by one or more entrepreneurs who have a unique or distinctive idea for a product or service for which they believe there is demand in the country. These companies usually form with bootstrapping as their initial funding.
Then attempt to attract outside funding from investors for the business. External funding includesseed funding, series funding, crowdfunding, and IPOs. Startups focus more on innovations and creative ideas. So there is always that risk factor involved in them. The success or failure depends on whether its creation would work as it is expected or not.
Some startups fail at the initial stages without gaining much revenue or popularity. This can be due to a lack of funding, a poor business model, or other reasons. Some startups have achieved tremendous success in the industry. Examples of startups are CRED, Nykaa, Meesho, Udaan, PharmEasy, etc.
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Investing In A Friends Startup
One of the best ways to invest in startups, though, is to find a personal connection to a startup thats looking for funding. Many startups rely on family and friends for early rounds of funding. Friends, family members, or associates who are in the process of getting a startup off the ground likely will welcome your investment.
There are a number of reasons why investing in a startup or someone you know makes sense. First off, you can personally ask questions about how the company is going to work. You can get details on the business plan, the mission statement, the hiring schedule and the company timeline. In other words, you can find out everything you want to know directly from the horses mouth, which lets you make the most informed investment decisions possible.
For startup investing, passion is key. It makes the most sense to invest if you are passionate about supporting both the project and the people behind the project. For most people, youll find no one you are more passionate about supporting than your family and friends, making investing in the startup of someone you know a good choice.
Do make sure you are confident in your friend of family members ability to follow through on the startups plan. You are blurring the lines of business and personal life. Still, think about the bottom line and make sure you are making an investment you truly believe could pay off.
Which Platforms Can You Use For Investing In Foreign Startups
Here are our favorite ones:
1. AngelList: AngelList is the worlds largest angel investing platform. To discover deals, you will need to join syndicates that work with the startups to launch the deals. Most syndicates are organized by themes like AI, B2B SAAS, Food & Beverage, D2C Commerce, etc. The minimum investment size is usually $1000, and you may need to be an accredited investor to participate.
2. Republic.co : The US is the worlds biggest economy and the largest startup ecosystem. Naturally, the investment opportunities that emerge there are attractive. Republic is one of the largest crowdfunding platforms in the US. It has helped companies raise over $200m across 250+ deals, with names like Robinhood and SpaceX under its belt. You can invest as little as $10 in a deal.
Republic also offers fractional real estate investing, where you can invest in a property and earn rental yield + capital appreciation. Like this $463,000 apartment in Nashville, in which you can invest as little as $115:
3. Seedrs : UKs premier crowdfunding platform, over £1 billion has been raised through Seedrs across 1400 deals. You can invest as little as £10 in an opportunity. The platform provides access to both UK and European deals.
Seedrs also has an active secondary market where you can purchase shares of pre-IPO companies like Revolut. You can even buy shares of Seedrs itself in the secondary market!
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How Much Money Can You Put Into Invest In Startups
Any individual, whether Indian, foreign, or NRI, may invest in venture capital, debt, or private equity fund as long as they have the required minimum amount of funds on hand.
An individual investing in any of the aforementioned instruments must invest a minimum of INR 1 crore.
In contrast, angel investment is solely contingent on your direct agreement with the startup you wish to support and has no minimum investment requirement. You should be clear with the amount before going on the step of how to invest in startups in India.
Funding Rounds Of Venture Capital:
If you are having trouble finding startups to invest in, try finding a seasoned venture capitalist. The capital required for the venture is provided by venture capitalists, who identify startups with a high potential return on investment. They may use their own funds or those of other potential investors. If you have enough money, you can either participate as an investor alongside a venture capitalist or you can directly invest in the funding rounds.
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A Desolate Funding Landscape For Edtech
Edtech was one of the few sectors, which saw a decline in funding across all startup stages, with late-stage funding suffering the most.
Late-stage funding in the sector declined 48.15% in 2022 to $1.97 Bn from $3.8 Bn in 2021. Similarly, growth-stage funding took a significant hit, falling 28.93% to $563.8 Mn in 2022 from $793.25 Mn in 2021.
Further, early-stage edtech startups, too, shivered in the harsh funding winter of 2022. After raising $73.15 Mn in 2021, the funding in early-stage startups declined 23% in 2022 to $56.63 Mn.
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Amid the funding gloom, test prep emerged as a clear winner, as startups in this space raised $1.13 Bn last year. However, the sub-sector saw a 63% YoY fall from the $3.05 Bn raised in 2021.
Similar is the tale of edtechs online certification segment. Startups in this space saw a funding decline of 22% in 2022, at $809 Mn, compared to $1.04 Bn raised in 2021.
Further, the funding in edtech SaaS and K-12 segments declined by 15% and 55%, respectively, in 2022.
Surprisingly, the year remained positive for startups in the higher education and upskilling segments. While the funding in upskilling startups rose 62% YoY from $61.3 Mn raised in 2021 to $165 Mn in 2022, higher education startups raised $149.3 Mn in 2022 versus just $79.05 Mn in 2021.
How To Invest In Startups In India All You Need To Know
How to invest in startups in India? This is a common question people who want to invest in startups ask to gain valuable experience and high returns.
India has one of the worlds youngest populations, and its economy is expanding rapidly. This makes India an appealing place to invest in startups, as they will benefit from the countrys continued growth.
Furthermore, Indian entrepreneurs are known for their creativity and innovation, and they have been responsible for some of the worlds most successful startups.
Usually, high-profile investors chase growth-stage and late-stage deals, pouring unprecedented amounts of money into the Indian market.
However, this increased confidence in Indian entrepreneurs, even early-stage startups that gain even some attention, has led to attracting significant investor attention.
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Become An Angel Investor
An angel investor is an accredited investor that typically provides the first check to startups looking to prove out their ideas. Wealthy individuals generally either provide that whole check, of less than $1 million or write a smaller check as part of the startup seed round for that business. Being an angel investor is considered to be very risky but it can be a good tax write-off while you help businesses get off the ground and if one hits it big then you could have quite the return.
The hardest part of being an angel investor, once you qualify, is sourcing opportunities. If youre not investing in a business for someone you know then the most common way to be an angel investor is to work with institutions that help startups. You can generally get access to businesses being built at incubators or through your network if you volunteer to offer business advice or potential funding to businesses.
Ways To Find The Right Startups To Invest In India
5 ways to find startups to invest in India
One of the most common ways of investing in startups is to become an angel investor. Angel investors are individuals who invest in promising startups in exchange for ownership in the business, usually in the form of equity. Now coming to the principal question how an angel investor can find such promising startups? Lets dig in!
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Is There A Hope For A Better Tomorrow
Last year, Indias edtech startups were forced to reassess their priorities and business models to become profitable. This happened after 2021s watershed moment when founders confused the spike in funding with the new normal and thought the bull run would continue.
However, they forgot to consider that the shift of education to online channels was due to a lack of offline options, as India faced the impact of multiple lockdowns.
The founder of CueMath, Manan Khurana, notes that it has become all the more imperative for Indias edtech startups to look at their business models and cut costs, without victimising their workforce.
Edtech businesses must be cognisant of their bloated CAC and shrunken LTV as it will lead to further increase in cost, Khurana said, adding that sustainability in terms of profitability and not valuation must become a fundamental tenet for the countrys edtech startups.
However, Mukul Rustagi, the cofounder and CEO of edtech unicorn Classplus, is of the opinion that categories such as upskilling, vocational training and test prep, especially government exams, would remain popular among Indians and flourish in 2023.
He adds that programmes related to vocational training and focusing on career and business skills will continue to grow online throughout 2023.
Why Do Startups Need Funding
Startups are businesses that strive for hyper-growth, which necessitates a large amount of capital and resources. These are their only options, and in most cases, the capital comes from outside sources.
External sources refer to the capital used to run the business, which is not just the personal capital invested by the founder. These are the funds that individuals and businesses invest to grow and earn profit.
The investment in a company is made with faith in the business and thus provides money and other ancillary resources to assist the founders in making the Startup a success.
External investors receive shares of the business and interest on the amount extended in the investment return . This acts as an incentive for the companys investors.
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Governance And Regulatory Roadblocks
A company going public has to adhere to all requisite compliances and regulations before it lists publicly. Mid-sized companies operating in a fast-paced environment may not be adequately equipped to ensure the necessary compliance, which may lead to delays or other unexpected roadblocks. This could lead to delays or deferment of the public offering.
Investing In Startups With Investment Platforms
One of the best ways for lower-level investors to invest in startups is through one of the many investment platforms focused on startups. There are a number of platforms available, but most of them work in fairly similar ways.
You can go onto the platform and browse the startups available on each platform. From there, you can decide where you want to invest and put money into the companies.
Different platforms have different rules about minimum investments and fees for access to the platform itself. Make sure to read carefully about each platform before making a choice to use that for your startup investing. Below, read the basics about a few of the popular options.
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Why Should You Invest In Startups
Some of the reasons one should invest in startups are:
- Startup investing offers great growth potential. Indeed, it is risky but it can also be rewarding.
- Startup investing is a good idea because it gives you a sense of belief in a new idea.
- It helps you to contribute to an appealing idea that you want to see in the world.
- It helps to develop stronger personal connections. When you have a share in the startup, you feel more connected to it.
- One of the best reasons is that it gives a sense of fulfilment. Seeing an idea come to life with you being a part of it. It is a feeling so many people like to feel.
Why Do Startups Fail
There are numerous reasons why startups fail, most of which can be avoided. This is because not all entrepreneurs create products that the market requires or wants to reward financially. Other concerns include a lack of funds, inadequate team management, poor marketing, higher prices, or more competitive competitors.
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Here Are Top 3 Ways Of Investing In An Indian Startup
1. Angel investing
Angel investors are wealthy private individuals investing in small businesses or early-stage startups. You can invest in startups through angel investing.
In angel investing, you will provide capital to startups in exchange for ownership shares. You will have to finance with your net worth. Hence, angel investing demands wealthy people.
You can give smaller amounts to the startups. But the amounts should be for a longer period. When you are an angel investor, you should continue to fund the startups for several years even if the firm has no profits. Usually, an angel investor invests in early-stage startups because early-stage startups need funding for the long term.
Being an angel investor is risky. What if the startup fails? Here comes the main twist. If the startup succeeds, you will get a high rate of return on investment. Generally, an angel investor gets ROI 10 times his original investment.
As the investors are investing with high risks, the expectations also go super high. They get around 10-50% of equity.
You can be an angel investor. There are many angel investing sites in India like:
Check out their sites to know their terms and conditions. Then, start investing.
2.Venture Capitalists
But being said that, let me inform you that VC faces a very high risk. If you are planning to invest in VC, researching about the start-up is a must-step to follow. Remember, the startup should NOT be in the early or seed stages.
Check out their sites.
Things To Consider As An Investor
There are a few key things to consider when investing in Gold Mutual Funds:
- Fund Management Fees: Gold Funds in India follow a fund of fund structure and primarily invest in Gold Exchange Traded Funds . This structure has a slightly higher expense ratio as compared to making direct investment in Gold ETF. But this expense ratio is still significantly lower than securely storing physical gold.
- Asset Allocation Considerations: You must bear in mind that gold as an asset class is best suited to diversify an Equity-heavy portfolio. This is because Gold and Equity are negatively correlated i.e. when Equities are down, Gold rises whereas when Equity is up, Gold drops. So Gold Funds cannot be the only investment in your portfolio and you also have to allocate your investments to other asset classes like Equity, Debt, etc. depending on your risk tolerance.
- Taxation: Gold Mutual Funds are subject to the capital gains taxation rules of Debt Mutual Funds. So, short term capital gains is applicable to Gold Fund units that are held for 3 years or less prior to redemption. These are taxed as per the income tax slab rate of the investor. If units of Gold Funds are held for over 3 years prior to redemption, long term capital gains taxation rules are applicable. The LTCG rate for Gold Funds is 20% with indexation.
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